September 16, 2025 • 49 mins
In this episode, Vanessa Chung explores valuation methodologies, sustainability, and cleantech trends. She shares insights into the evolving cleantech landscape and the circular economy. The discussion covers equity research fundamentals, sustainable and ESG investing, and valuation methods like multiple and discounted cash flow (DCF) approaches, using Apple as a case study. Vanessa examines forecasting Apple's free cash flows, terminal value, discount rate, and WACC. The episode also discusses enterprise and equity value calculations, model adjustments, sensitivity analysis, and comparables. Vanessa highlights using Koyfin for public company research and shares workflows for evaluating investments and exits.
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Episode Transcript
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(00:00):
So typically we will use two methodologies.
(00:04):
The first one is multiple approach and thesecond one is DCF approach.
So for multiple approach, can see here some ofthe metrics that we typically see and some of
you are familiar with.
So you can compare these metrics against acompany owned history or you can compare them
against different peer group within a differentcompany within the same peer group.
(00:28):
So I guess one of the questions that you mightask is which metrics should we use?
Welcome to The Investor, a podcast where I,Joel Palofinkle, your host, dives deep into the
minds of the world's most influentialinstitutional investors.
In each episode, we sit down with an investorto hear about their journeys and how global
(00:51):
markets are driving capital allocation.
So join us on this journey as we explore theseinsights.
OneWebShow here with Vanessa Chung and, excitedto have her here.
She's a venture capitalist and impact investor,and is currently at Axis.
(01:13):
So and she's gonna actually walk us throughdiscounted cash flow and talk about how to look
at ESG investment.
She's a, you know, impact ESG expert, and she'sgonna actually teach us stuff and go through
financial model that she's built.
Excited to learn from you.
(01:34):
She, you know, was able to kind of, you know,run through this a couple months ago and then I
bring her on to kind of share this with thecommunity.
Vanessa, thanks for being kind enough to sharethis with us.
Maybe you can just spend a couple minutes justwalking us through your career, your education
and how you got to where you are now and thenwe'll jump into it.
(01:54):
Yeah, sure, definitely, Jo, and thanks forinviting me to the show and it's definitely my
great pleasure to be here and share mylearning, especially in the public investing
space.
So yeah, thanks for the introduction and just alittle bit about myself.
So after university, I spent two years inequity research.
So I was at Credit Suisse covering paper andpackaging and building materials.
(02:17):
So it was certainly a very great learningexperience and I learned a lot from it, from
talking to different investors, to seniormanagement and also during a couple of site
visits.
So during that period, as soon as I waslearning more about the pavement packaging
industry and also the cement industry, I gotreally interested in sustainability because
(02:40):
those industry, they emit a lot of carbons anda lot of, they use a lot of energy.
And so there was a lot of talks amongst theinvestment community to to analyze which
packaging materials is actually the mostsustainable and how can they invest in more
sustainable companies.
So that was how I got really interested in theidea.
(03:01):
And then partly because of that interest andalso wanting to gain more experience working
for corporates, I joined Access Technologiesover a year ago.
So they are a wood science technology company,very eco friendly and also fast growing as
well.
So I'm helping them as my role in businessdevelopment, helping them to form partnerships
and also expand to the rest of the world.
(03:23):
And then as you mentioned, on top of that, I'man investment team in Southern Capital.
So I'm focused mainly on impact and also inclean tech, which is a fast and growing area
and certainly very, very interesting and see alot of different business, different
technologies emerging currently.
So very exciting space to be.
No, absolutely.
(03:43):
Yeah.
Well, hey, what are your thoughts just based onthe last couple months of learning?
What are some takeaways that you would takeaway from just impact and clean tech?
Yeah, sure.
Certainly see a lot of different companies andvery interesting to talk to founders.
They all have very great vision how theirproducts can change the world really.
(04:05):
And certainly I think as you know, and thetrend recently is there seems to be more talk
about the Cleantech two point zero, which isvery different from the Cleantech one point
zero, which was in the early two thousandperiod.
So it seems that investors are more focusing oncompanies that can generate profits as well as
the social impacts at the same time.
(04:27):
Whereas in the past, it might be more on theprofit side or yeah, it's more difficult on
that side.
And then one trend that I'm particularlyfocused on is the circular economy trend for
those that you're less familiar with it.
Basically at the moment we are kind ofconsuming on a linear model where we make
(04:49):
things, we consume them and then we justdispose them at the end of life.
But actually in a circular model, it will beeverything.
The material will be in use in kind of acircular fashion where maybe after we're using
the products, we can recycle it, we canremanufacture it, or the waste of that product
can actually be raw material for anotherindustry.
(05:11):
For example, some companies that I've lookedat, they use chicken feather to make packaging
materials, or they can use other wastematerials like plastic, ocean waste plastic to
make other materials as well.
So I think that's certainly something that I'mvery interested in and great to see a lot of
these innovative products coming on.
That's great, cool.
Well, anybody have any questions aboutVanessa's career and how she transitioned
(05:37):
before we jump in.
All right, I guess we'll just go ahead and jumpin and feel free to message some questions in
the chat and I'll go ahead and try to call themout as we go, but I'll let you do your thing.
Oh yeah, any question just please shout at anypoint and if I not explain it clearly as well.
(06:00):
So hopefully you can now see the screen.
Yeah, we can see it.
Yep, that's great.
So yeah, today I just wanted to talk about abit about equity research, what it is, and then
about valuation in the public stock market aswell.
So I'll walk through different methodologiesand also do a case study to value Apple, the
(06:23):
stock.
And then I guess one thing to emphasize isvaluation.
As some of you might heard the phrase, it'smore about, it's more of an art than a science
in some sense because it relies on yourassumptions and your judgment and what your
view are on the company.
So although today I'm going to show you all thetools and the resources you need, ultimately as
(06:46):
an investor, you need to make that judgmentyourself whether you think that company is good
to invest, as I'm sure, Joe, you agree.
In the VC world as well, it depends a lot ofyour judgment and how do you see the world in
ten, fifteen years time.
Yeah, absolutely.
So yeah, firstly, just on a bit about equityresearch, what it is.
(07:06):
So basically it's a fundamental analysis onstocks to provide investment ideas.
So we tend to look a lot in-depth into thecompany's financials, the industry they operate
in and also some of the risk involved and thevaluation as well.
So in equity research, we can split into sellside and buy side.
(07:27):
So the sell side will be all the investmentbank, for example, like JP Morgan or Goldman
Sachs.
So they will provide research reports or ideasto investors.
And then these institutional investors who arethey?
They are the buy side clients.
So they are the pension funds or funds in thelikes of Fidelity or BlackRock for example.
(07:48):
So these are the investors.
They have actually got the capital to allocateand to invest.
So they typically invest according to theirfund mandates.
So their fund mandates could be geographical.
They invest in US for example, or they investin particular sector like the tech sector.
So teams, are usually structured by sector.
(08:09):
And one thing to stress is in the sell sideanalyst world, they tend to focus on the
smaller sets of stocks, for example, like 15 to20, because the ultimate goal is to be the
expert in your sector and in those 15 to 20stocks and when the buy side clients they want
some opinion advice, they will think of you andcome to you for your advice and opinion.
(08:33):
Just to show you what a typical equity researchreport looks like, So they range widely from
very short kind of two, three pages to quitelong forty, fifty, or even 60 pages depending
on what you want to write.
And if you want to write a really thematicindustrial piece with a lot of data then you
can write a lot about it to showcase all youranalysis.
(08:56):
So a typical one based on company would besomething that looks like this.
On the left here we will have the company nameand the body of the tax here will mostly
surround, will be mostly about your investmentthesis.
Why do you think that company is something goodto invest in?
And then we will have the rating here.
(09:19):
So you have buy, hold or sell.
Sometimes it depends on the companyterminologies as well.
So in this instance, it's overweight, whichmeans buy and certainly this analyst thinks
that twenty first Century Fox is a good stockto buy.
And then you have your price targets which wewill come on to later on how we derive that.
(09:42):
And then you will also have a risk sessions andsome of the valuation methodology and you will
also include a catalyst as well.
So this could be an event where you think,where you believe your investment thesis will
materialize.
So example could be if there's some newregulation coming in, then the catalyst will be
new when regulation is launched.
(10:03):
This is when your investment thesis will bematerialized.
So I'll just move on.
Sure, I thought it'd be kind of interesting toshow what a day is like as an equity research
analyst.
So I'll focus on the sell side first becausethis is mostly because this is what I'm
familiar with.
So usually it's quite, usually you can divideyour year into two period, you will have your
(10:27):
normal period and you also have your earningseason.
So during normal period is actually very, veryearly in the morning, we go to work, we arrive
at our desk at 7AM to catch up all the news andthis is when all the big announcement will be
released.
So you need to be ready if in case anythinghappens in the stocks that you cover.
(10:48):
If you publish your research overnight, thenyou'll spend your morning meeting with your
sales and you also call clients afterwards.
And then the rest of the day, it really varies.
It can be, you can continue your research workwhether they are big industry reports or
company updates or you can meet with clients oryou can speak to a company or industry
(11:08):
consultants in order to get a more updated viewor the recent view on some of the trends that
is happening in your sector.
So this is the normal period.
And then during earnings season which publiccompanies they usually announce their results
four times a year to update their investors.
So it can be quite hectic sometime.
So at 7AM they will release their earnings toshow this is the revenue or this is the
(11:33):
financial they achieved in the past quarter.
So your goal is to quickly digest the news ifthere is anything, any surprise or if they
perform according to your expectation.
And then you will quickly update clients saleson your view.
And then at 9AM is usually when the companywill present.
So you will have the CEO, the CFO and thesenior management of a company present their
(11:55):
quarterly results.
And then there will be also a Q and A sessionfor the analysts to ask questions as well.
And then for the rest of the day, you'll spendyour time digesting the news, thinking about
updating your company model if the news todayaffects your forecast of the company and
publish a new view.
So this is kind of a overview of the job natureand also a day in the life of an analyst.
(12:24):
And then something that I just wanted to touchon quickly is about sustainable and ESG
investing which is fast and growing.
Recently in recent years, I'm sure a lot of youhave heard the phrase ESG which stands for
environmental, social and governance.
And certainly it's a big area and there aredifferent strategies within the ESG investing
space.
(12:45):
So I just wanted to quickly introduce some ofthese ideas.
Certainly there are more resources and I canspend kind of the next hour talking about it
but this is just more of a high level summary.
So on the right here, you can see there is aspectrum different strategies.
(13:06):
You can go from financial only to impact only.
So this will be just kind of normal traditionalinvesting where you consider all the financial
results.
And then here you gradually incorporate moreand more different kind of ESG factors into
your investment consideration.
And then on the right here, it'll be kind oflike a charity or you give out donation or
(13:31):
grants where you only focus on the impact andthen you don't really care about the financial
return it generates.
So kind of the ESG investing is sit withinthese areas where we want to do good for the
society but then we also want to generate afinancial return.
And there are various strategy within the ESGinvesting space.
(13:52):
And nowadays we see more data providersstarting to provide these type of information.
So we've got MSCI and also Sustainalytics whichI think recently got acquired by FactSet.
So they are companies that provide a lot of thesustainable data.
For example, it's a bit like a credit scoring.
(14:13):
So for example, I know that MSCI, they're agreat company from CCC to AAA according to
their scores on ESG.
So if the company scored AAA then they will bedoing very great on all the ESG different
metrics.
So how investors use these data?
They can use it by negative screening or theycan by kind of screening the bottom by
(14:37):
screening out the bottom 10% of the company orthey can do positive screening by screening in
the top 10% of the company that performed wellunder these metrics.
And then we also have other strategy likethematic investing where investor only invest
in renewable energy for example, or they onlyinvest in electric vehicle.
(14:59):
And then at the far end we also have impactinvesting.
So this is a strategy that mostly more commonlyseen in private equities or financial capital.
So it is about investing in companies thatgenerate positive impact in social terms of and
environmental footprint.
(15:20):
So here you'll be actively seeking companiesthat do good for society whereas ESG sometimes
it can be a bit of a screening exercise.
So yeah, certainly an emerging area and thereare lots of new funds that are launching and
also different strategies as people arestarting to incorporate a lot of these
consideration into their investment strategies.
(15:44):
Any question from now?
Or I'll move on to the main topic for todaywhich is about valuation.
So yeah, typically I'll mostly focus onvaluation within the public investing space.
So typically we will use two methodologies.
(16:06):
The first one is multiple approach and thesecond one is DCF approach.
So for multiple approach, you can see here someof the metrics that we typically see and some
of you are familiar with.
So you can compare these metrics against acompany owned history or you can compare them
against different peer group within a differentcompany within the same peer group.
(16:31):
So I guess one of the questions that you mightask is which metrics should we use?
And a lot of the time it depends on the companyand the type of investor you are.
For example, if you invest in technologycompany and maybe they are very early stage and
they don't even have earnings.
Yeah, for example, like Uber or Lyft, theygenerate that income yet.
(16:52):
So you can't really use price to earningsratio.
Investor would typically use divided by salesas a metrics to evaluate those companies.
And for example, if you are a income investor,you care a lot about dividend, then you will
use dividend yield as your analysis.
But in reality, we look at all of them and thenwe just kind of see what is most appropriate
(17:22):
according to the company or the sector that youlook at.
So this is kind of a, on the right here is atypical comparative table that you will see in
a lot of the research reports.
So firstly, for example, if you want to analyzethe beverage sector and you will have a peer
(17:42):
group, so the first step will be to identifyall the relevant peer groups.
So you've got like Coca Cola here, PepsiCo, andMonster Beverage here, for example.
And then you will compute all of this data soyou can find them on either Bloomberg FactSet
or Yahoo Finance, for example.
And then you will compute the multiples.
(18:04):
And then you will think about, oh, why is CocaCola trading at a premium compared to PepsiCo?
Is this fair?
And if this is not fair, then is there anyreason that can justify that?
Or that, I guess that kind of thinking processcan inform your investment thesis.
For example, if you think that PepsiCo, thatseems to be able to grow much quicker or they
(18:30):
have a new strategy that you believe they canexecute on it, that maybe PepsiCo should be
trading kind of closer to Coca Cola.
And then that will kind of, that thinkingprocess will kind of inform your view on the
company whether that valuation is fair or not.
So yeah, I think this is a quite good approachvery quickly that you can see if there is any
(18:54):
kind of mispricing in the market or if you canjustify these gap between the companies.
But yeah, I'll come back to this again when wego through the Apple case study.
And then the next valuation method is DCF whichI'm sure a lot of you have heard of before.
(19:17):
So what a DCF is to calculate the valuation ofa company and what is a valuation of a company
is essentially you add up all the future freecash flow a company generates and then you sum
it all up and then discount it back to today'sprice.
So it's a bit like the graph here.
So firstly you project all the free cash flowin each year and then because you can't really
(19:42):
project it infinitely so at the end of theperiod you kind of have a terminal value and
then you sum it all up, discount it back totoday's price.
So this will give you an enterprise value whichis the total value of a company.
And obviously there are different owners for acompany.
You've got the debt or the debt provider,you've got the equity provider and other
minority interests as well.
(20:03):
So as an equity investor, you are mostinterested in the equity portion.
So you minus debts, you minus the monetaryinterest and you'll get to your equity value.
And then if you divide that equity value by thenumber of shares, you will get your share
price.
So fundamentally this is kind of the concept ofit but I'll show you the calculation step by
(20:24):
step in our case study later.
So yeah, these are just some of the formulas inorder to derive exactly what these things are.
But yeah, I'll show you in our Excel model gothrough later on.
And then just some kind of thinking about thepros and cons for each method.
(20:48):
In real life, we will use both the multipleapproach and DCF approach.
Usually some analysts, they would take anaverage of these two approach because each of
these approach, they have their pros and cons.
For example, the multiple approach, you can seethat it's really easy to get all the datas.
It relies on fewer assumption, but thensometimes it's really hard to find the
(21:12):
comparable companies.
For example, for Apple that I'll come on tolater on, it's kind of hard to think of another
company like Apple.
I mean, you've got other software internetcompany like Microsoft or Google, but they are
more of an internet company and they don'treally produce a physical product like Apple.
So finding a comparable group is sometimes itcan be tricky.
(21:35):
And now on the DCF side is very flexible.
You can model a lot of things into it.
You can even split it out into multi stagegrowth for the company.
So you can incorporate a lot of theassumptions, but then the cons will be based on
a lot of assumptions and the sensitivity of theshare price will be based on the assumption and
(22:01):
also on the terminal value as well.
I think DCF will work particularly well forvery stable company.
For example, like Unilever or Coca Cola perhapsbecause they are the companies that generates
certain amounts of cash each year.
So it's very easy to forecast.
But then if it is a highly cyclical company,it's very difficult to forecast the kind of
(22:23):
company performance throughout the businesscycle.
And then in a startup world it's even moredifficult because it's very difficult to
forecast the company in kind of a five to tenyears horizon.
So these are kind of the pros and cons for thetwo approach.
And now if there is no question at this point,I'll move on to our case study on Apple.
(22:51):
Yep, so I choose Apple as an example becauseall of us know what they do and that we can
quickly see use the method that we learned sofar and apply it to calculate the share price
of Apple.
One thing is to stress is this is more of akind of an exercise rather than any investment
(23:12):
advice.
So it's more about going through themethodology that we learned in order to
calculate the share price for Apple.
So yeah, some background news recently.
I guess, yeah, you can see from this chartalthough it's PE ratio rather than the share
price but the share price kind of correspondquite nicely to that as well.
(23:33):
You can see from January 2020 they have a verygood run or year to date the share price goes
up by 40% which is a very, very good return.
And recently as most of you know, theyannounced some product release including the
new iPhone, the five gs version, which kind ofcontributed some of the spike here.
(23:56):
And then last week they announced they had anearning release which after that the share
price kind of drops.
So it could perhaps be, yeah, it kind of resetinvestor expectation or they have some other
concern regarding the company futureperformance.
Some of them could be due to COVID or some ofthem could be due to because they decided to
(24:17):
delay their five gs phone launch by a fewmonths.
So that could impact on their companyperformance.
So yeah, firstly just using the technique thatwe've learned so far, the first one will be the
multiple approach.
So you can use multiple approach to compare thecompany with its own history.
(24:39):
So this is exactly what I did here.
So you can see on a PE ratio perspective, thecompany they have been historically trading at
about 10 times to 12 times PE ratio.
But then recently it seems that they have goneup really, really massively and they have now,
I know it's a bit small here, but they are nowtrading on a 28 times earning next year.
(25:00):
So I guess as an analyst, need to think about,what's behind the driver of this increase?
Is it fair or are we overvaluing the company?
Has there been some fundamental changes to thebusiness itself?
And then we can see a similar trend forEVEBITDA ratio as well.
(25:21):
It has gone up massively last year.
And that another approach will be to comparethe different ratio against some of the peer
group for Apple.
So in here I've chosen Microsoft, Google andFacebook.
Although I guess some people would argue theyare not a true representative of peer group,
(25:44):
but I just show it as an illustrative example.
So we look at, so Apple is the blue color here,whereas think it might be quite interesting to
compare against Microsoft which is the redcolor here.
So you can see that Apple has traditionallybeen trading as a discount to Microsoft And
(26:06):
some of the reason could be because Microsoftas a more software company, they typically have
high margins.
They can also scale quicker rather thancompared to Apple which they produce a tangible
product.
So this is kind of the reason why there hasbeen a valuation gap between a company.
So this valuation gap kind of lasts until 2020.
(26:29):
And then this is kind of the COVID period.
And then after that it seems the gap hasshrunken.
So now Apple has been trading very in line withMicrosoft as well.
So a question to think about will be, again, isthis justifiable?
Do we think the market is overvaluing Apple orhas there been some fundamental changes to the
(26:52):
company itself that investors seems to beplacing a higher valuation on the stock at the
moment?
So again, a similar story for EVEBITDA as well.
Oh, and then I think I can now show you on theDCF model, how do we actually calculate the
(27:12):
share price?
So if I just switch to model.
Yeah, if I make it slightly larger.
(27:33):
Okay, so just to recap the formula, DCF we wantto forecast all the free cash flow for the
company.
We want to sum them up and we also want toinclude a terminal value and then we discount
it by a discount factor called WACC.
So we will go through these all step by step.
(27:56):
So firstly, will want to forecast the free cashflow firstly, which is this is the formula for
it.
Essentially, you just want to add up all thecash item that a company generate per year.
So for example, why do we want to add backdepreciation and amortization because they are
not a cash item.
Why do we want to minus CapEx?
(28:17):
Because CapEx is the actual capital expenditureyou spend per year.
So we want to minus that.
So it is a cash outflow and that's definitelywe want to minus that.
So in here I did exactly that in thiscalculation here.
So I'll have my EBIT here which is just revenueminus the operating cost.
(28:38):
So I base it all on twenty twenty actuals.
So my starting point is this year and then I'llforecast it what will the business be like from
year one to year five, for example.
So just on the formatting, you can change allthe cell in yellow.
So you can change all of them here and then allof these should just calculate automatically.
(29:03):
So if you want, you can change it to anothercompany and you should be able to populate
their share price quite quickly as well.
So yeah, just on the forecasting.
So firstly we wanted forecasted revenue item.
So these are the assumptions that I choose.
It's kind of arbitrary at this point because ifyou want to form a informed view, would need to
(29:24):
go through the company financials and also do alot of in-depth industry and company research.
So at the moment I just assume the company willgrow by 15% next year just because of the new
iPhone launch and then assume a 5% growthafterwards.
For EBIT margin, I assume they will gain by 1%next year and then kind of just grow at a slow
(29:48):
rate in future period.
For the items, I just keep them flat for now sothat we can focus more on the calculation
rather than the assumption at this point.
So this is exactly how I calculate theunlevered free cash flow as I was showing in a
formula by summing all these items together.
(30:09):
And then you want to discount this free cashflow back to today's value and that this form
the first part of our calculation which issumming the cash flow from year one to five.
And then for a terminal period, we have twomethods that we can use.
So going back to the formula here, we caneither use the exit multiple or the perpetual
(30:36):
method.
So the exit multiple, just say, imagine Appleget acquired in five years time, what would the
multiple be and what is the value of thecompany at that point?
Another perpetual method is just rather thansumming it all these up individually, it is a
mathematical neat way of saying summing fromperiod three at this point to period end, and
(31:04):
then this is a mathematical equivalent to that,which is you have the end period free cash flow
for the end year period, you do one plus thegrowth rate and then you divide up by the WACC
minus growth rate.
So going back to the DCF, this is exactly whatI did.
(31:25):
So go through the multiple exit multiple methodfirst.
So I take the end year period and the EBITDAfor year five, And then I assume an 18 times
exit multiple.
I mean, can change it to other multiple, but Ithink this is kind of appropriate just by
(31:46):
looking at historical trend and kind ofcomparing it with peer group.
So, I choose 18 times in this calculation here.
And then for the perpetual growth, so this isthe calculation that I was showing earlier.
So, you do the free cash flow for the n yearperiod, multiply it by the growth rate which I
(32:08):
assume is 3% terminal growth rate and then youdo the WACC minus the terminal growth rate.
We have been through this calculation and thenthe final session will be how do we come up
with the discount rate.
So what the discount rate is, so it's calledthe weighted average cost of capital.
(32:31):
It is kind of showing yeah, it's kind ofshowing the capital structure of a company
because usually for a company they will requiresome equity and also some debts and this is
just the cost of that capital, how expensive orhow cheap it is in order for them to access
that capital.
So it's kind of a weighted average calculation.
(32:53):
So I can go through the calculation here at theend, which you can see on this session here,
the WACC calculation.
So firstly, on the cost of equity, this is thecalculation we typically use.
So we will use the risk free rate and then weplus the beta times the equity risk premium.
(33:14):
So that's our cost of equity.
And then on the cost of debt side, this will bethe interest rate the company paid minus the
tax rate.
All of this information you can get either fromYahoo Finance or the company financials itself.
And then on the proportion of debts and equity,so this is the debt Apple has last year and
(33:39):
then this is the market cap at the moment whichis part of the equity.
And then throughout this calculation, Icalculate a WACC of 7.9%, kind of like 8%.
So we are going back to here.
We now talk through how do we calculate theterminal value and the free cash flow for the
(34:02):
initial period.
So this will be our enterprise value.
And then now, as I was showing earlier, we needto minus the debts because as an equity
investor, we are only interested in the equityportion.
And we also add that cash, which is the cashthat we can access to as an equity investor.
And then we divide it by the number of sharesApple has.
(34:24):
And then based on these assumption, I calculatethat Apple should The kind of the equity value
for Apple is $98 per share.
So yesterday when I was looking up, they weretrading at 109 yesterday.
So this is just that based on theseassumptions, it would suggest a 10% downside.
(34:46):
But obviously you can change these assumptionsreally quickly.
For example, if you think Apple next year willbe growing by 20%, you can quickly change that
and then you can see the valuation going up.
I mean, if you're not positive about the iPhonelaunch then you can change it to 3% that will
show you some more downside to the currentshare price.
(35:10):
So all of this, you can quickly see how as aninvestor you can calculate based on DCF the
valuation of company really quickly.
Any question at this point?
Yeah Vanessa, the blue cells, the ones withjust the blue text, are those just cells that
are referencing another cell or can you adjustthose too?
(35:33):
Yes, that's right.
So yeah, it's just referencing another cell.
So these are the calculation that was done.
So all of the yellow ones you can change andother ones, it just automatically calculated.
Cool.
So hopefully it will be, this is a very step bystep walkthrough of this calculation here.
(35:56):
But I guess just to emphasize the concept isjust to add order of cashflow for a company and
then discount it backwards.
That's the high level of what this is trying todo.
And then here you can see the sensitivitybecause I was talking earlier about how the DCF
methodology depends a lot of the assumptions.
(36:16):
So this is just a sensitivity table that Ithought we useful to show.
For example, at the moment we assume about an8% WACC and also a 3% terminal growth rate,
which makes our price at about a 100 at themoment.
But then if we increase our terminal growthrates and if we decrease our WACC, we can
(36:37):
arrive at this price kind of based on these twoassumptions.
So I think this is just a good way, especiallyif you are an investor, want to have that
sensitivity analysis and to make sure you'recomfortable with the evaluation that would
gives you a potential upside.
So this is the DCF method and then back to themultiples method I was talking about earlier.
(37:05):
This is again, you can play around with itbased on the assumption that you choose.
For example, if we use a EVEBITDA method, sothis will be the Apple's EBITDA for next year
and that if we believe they can trade, theywill trade at an 18 times multiple, then I can
type in 18 times here.
(37:26):
And then you can see based on theseassumptions, it will suggest a 12% downside to
the current share price.
But then if I believe that Apple's, they cansustain a high multiple, for example, two, then
it will show you the upside that you cangenerate.
And I think this is particularly usefulsometime when I evaluate some of the startup
(37:46):
deals as well, because ultimately this willgive you a valuation when you want to exit and
then you can work backwards to see how muchvaluation upside you can gain as an early stage
investor.
And as the company progress, what is thevaluation they are likely to achieve And then
what is the potential there are for foreigninvestors?
(38:13):
So yeah, this is just a quick walkthrough ofthe model.
Something that I was thinking about showing aswell unless there is other question at this
point.
Any questions guys?
(38:37):
So yeah, some of these information I got fromKoiFem which is a free platform for people to
use.
It's bit like Yahoo Finance but I think it'smore, it has got more data and also the user
interface, quite like it as well.
Because earlier I was talking about the comtable and how does Apple compare to other
comparison, for example.
(38:59):
And then in this table here, select all thepeer group.
And then you can see that, for example, if I goto the margins, Apple, they have been Their
EBITDA margin was about 30% last year.
But now for Microsoft, which is a softwarecompany, they are a 45%.
(39:19):
So maybe part of the valuation gap can bejustified by just the fact that Microsoft has a
higher margins, for example.
So this is quite a neat way to show some of thedifferences in valuation and whether you think
is justified.
But yeah, I thought that would be interestingto show.
For example, Microsoft, they pay a highdividend, which sometimes investors like as
(39:43):
well.
And that will certainly be factoring into thehigh valuation.
That's great.
Cool.
What are some of the pros and cons with Koyfinversus some of the other tools?
I think maybe what would be helpful if we got afew minutes is what tools you can use, whatever
(40:08):
you're allowed to share when you do research.
Because we got Koyfin, got Bloomberg, we gotThompson.
Coyfin, I think they're a startup, butobviously they haven't been around as long as
some of these older companies.
So what are some of benefits?
Then maybe a couple of workflows that you dowhen you're researching maybe a new public
(40:31):
company.
Yeah, sure.
I think maybe what should we, we can do a testone for example.
So yeah, I really like the Khoefan platformbecause it gives me a lot of data points.
So for example, I think that the platform, itlooks a bit like Bloomberg or Reuters, but I
(40:55):
think for a retail investor like myself andsome people in the audience, we don't have the
access for Reuters or Bloomberg because theyare typically for institutional investors.
So I think Koinfen is a very good alternativefor retail investors like ours.
So it has all the essential information youneed.
One session that I really like as well is theestimate session because in here you can see
(41:19):
what do analysts and people in the investmentbanking world, they forecast in terms of the
revenue, EBITDA or EPS.
So you can know that what been for, what been,what is the expectation of this company?
Because usually when company, when theyunderperform the expectation that share price
(41:45):
would come down.
If they over perform, they over deliver thenshare price would go up.
So this is a very quick way for you just to seewhat is the expectation embedded in the share
price at the moment and then whether you thinkit's justified or not.
Also like the chart sessions because here youcan input other security as well.
(42:09):
So some of the charts I was showing I generatedon Poison.
What is a good stock to choose?
Maybe I'll show some packaging company that I'mmore familiar with.
So for example Crown, they are a metal beveragecan company.
(42:34):
So you can quickly see their price movementhere.
And then if I want that valuation then I canquickly select the valuations and go into kind
of the EVEBITDA multiple.
I can compare it very quickly with anothermetal beverage company and see the valuation
gap, for example.
So again, this is very easy to show.
(42:57):
And I guess the major benefit of Kotlin is freeto use, or at least for now, not sure if they
are going to charge in the future.
And then just some workflow or other resourcesthat I use, I typically go on to, so if I'm
researching a new company, would typically goto the investor relations page, I'll download
(43:17):
their annual report and see the latest earningsbecause through that you will see the latest
trends that the company is going through, howare they performing against expectations and if
they have any new strategy and things likethat.
And usually in annual reports you can find lotsof detailed information on the industry
(43:38):
structure, some of the trends, some of thedriver as well.
So it's very useful information.
And then other than that, I'll just go ontothis platform and then quickly look at the
valuation side.
If I think the valuation potential, then I'lldo more in-depth research.
If I think the company is kind of fairlyvalued, then I'll just put it on one side and
(43:58):
then focus on other companies.
And I think sometime maybe for our cohorts andthe startup invest VC investors as well.
Some of the things that might be useful is justto, because sometimes you ask us what is the
potential upside or potential exit that ourcompany can have.
(44:20):
So you can quickly go to the platform that Iwas showing earlier.
You can get a list of companies.
You can see that exit multiples, which couldinform you what are the multiples that the
company in the sector are trading at themoment.
And from there you can work on your potentialexit opportunity for a startup.
(44:47):
So yeah, this is poison.
Great.
Yeah, that was helpful.
All right.
Any other questions from the audience?
Okay, I guess it was so informative that thatyou answered everybody's questions already.
(45:10):
Yeah.
I'm just thinking of exiting.
Oh, stop sharing.
There you go.
Okay.
I can now see you.
Yeah.
There we go.
Well, good job.
Thanks so much for sharing that info.
That was really helpful.
I think it's a good overview of just kind ofplaying with the models.
And I uploaded the links to the deck and themodels so people can play with it, know, make
(45:33):
your I guess for your recommendation, somebodyshould make a copy of the Excel and possibly
look up a different company and plug in thenumbers and then make some assumptions on how
much the company is going to grow.
Yeah, that would definitely be myrecommendation.
You can also choose your favorite company, acompany that you're familiar with, and then
(45:54):
just see if the valuation is what is expecting,the company is currently trading at the moment,
just to see what the assumption is like and geta feel of it.
That's great, cool, awesome.
High
level, but then if people are interested, thereare certainly more advanced models that we use.
(46:16):
Typically for DCF model, we will we will breakdown the revenue by segment, for example.
So for example, in the case of Apple, then wewill break down the revenue for iPhone, for the
iWatch and different components of it.
We will also forecast the profit by segment aswell because that way you get a more detailed
(46:39):
analysis and detailed forecast which ultimatelydrives the valuation.
You all want to have those details in if youare doing it in real life or as career or
profession.
In the private markets, look at comps.
Do you guys also do that as well?
Maybe other consumer electronic companies, ifyou're looking at Apple, as far as their EV to
(47:06):
equity multiple?
Is that kind of a common practice?
What's the best way to do that?
Do you just take the average of the comps ofwhat their multiple is and then just kind of
use that as a benchmark?
Yeah, yeah, we will certainly do that as well.
And it depends on how closely comparable howcomparable those peers are.
(47:28):
Some people just use an average or some peoplewill choose some particular company as
benchmark and average.
I think that certainly works well for someindustry but less so for others.
Yeah, I mean in a commodity company like metalpackaging, for example, essentially every
producer, they are producing the same amount,same type of products.
(47:51):
So you can argue they should be trading on asimilar multiple because essentially the
business are the same.
But then I guess there are other nuances likedifferent company strategy, different
geographical region that they are exposed to.
So a lot of these factors can be, you canincorporate as well.
So definitely a very fun exercise and yeah andI guess I've seen some stats saying that people
(48:15):
nowadays because guess everyone kind of in thelockdown period there's been some spike in
either like Robinhood in US or in The UK we useFree Trade or other apps like that.
So there has been a spike in retail investorinvesting or have the time to at least explore
the opportunity.
(48:35):
So that's quite interesting.
Good news for Robinhood, right?
Yeah.
Cool.
All right.
Well, anybody else have any final questionsbefore we close out?
Cool.
I guess not.
Well, thanks for your time and catch up withyou guys soon.
Cool, sure.
(48:56):
And thanks for everyone here and lookingforward to speaking to you all and get
connected.
All right.
Bye guys.
So typically we will use two methodologies.
(00:04):
The first one is multiple approach and thesecond one is DCF approach.
So for multiple approach, can see here some ofthe metrics that we typically see and some of
you are familiar with.
So you can compare these metrics against acompany owned history or you can compare them
against different peer group within a differentcompany within the same peer group.
(00:28):
So I guess one of the questions that you mightask is which metrics should we use?
Welcome to The Investor, a podcast where I,Joel Palofinkle, your host, dives deep into the
minds of the world's most influentialinstitutional investors.
In each episode, we sit down with an investorto hear about their journeys and how global
(00:51):
markets are driving capital allocation.
So join us on this journey as we explore theseinsights.
OneWebShow here with Vanessa Chung and, excitedto have her here.
She's a venture capitalist and impact investor,and is currently at Axis.
(01:13):
So and she's gonna actually walk us throughdiscounted cash flow and talk about how to look
at ESG investment.
She's a, you know, impact ESG expert, and she'sgonna actually teach us stuff and go through
financial model that she's built.
Excited to learn from you.
(01:34):
She, you know, was able to kind of, you know,run through this a couple months ago and then I
bring her on to kind of share this with thecommunity.
Vanessa, thanks for being kind enough to sharethis with us.
Maybe you can just spend a couple minutes justwalking us through your career, your education
and how you got to where you are now and thenwe'll jump into it.
(01:54):
Yeah, sure, definitely, Jo, and thanks forinviting me to the show and it's definitely my
great pleasure to be here and share mylearning, especially in the public investing
space.
So yeah, thanks for the introduction and just alittle bit about myself.
So after university, I spent two years inequity research.
So I was at Credit Suisse covering paper andpackaging and building materials.
(02:17):
So it was certainly a very great learningexperience and I learned a lot from it, from
talking to different investors, to seniormanagement and also during a couple of site
visits.
So during that period, as soon as I waslearning more about the pavement packaging
industry and also the cement industry, I gotreally interested in sustainability because
(02:40):
those industry, they emit a lot of carbons anda lot of, they use a lot of energy.
And so there was a lot of talks amongst theinvestment community to to analyze which
packaging materials is actually the mostsustainable and how can they invest in more
sustainable companies.
So that was how I got really interested in theidea.
(03:01):
And then partly because of that interest andalso wanting to gain more experience working
for corporates, I joined Access Technologiesover a year ago.
So they are a wood science technology company,very eco friendly and also fast growing as
well.
So I'm helping them as my role in businessdevelopment, helping them to form partnerships
and also expand to the rest of the world.
(03:23):
And then as you mentioned, on top of that, I'man investment team in Southern Capital.
So I'm focused mainly on impact and also inclean tech, which is a fast and growing area
and certainly very, very interesting and see alot of different business, different
technologies emerging currently.
So very exciting space to be.
No, absolutely.
(03:43):
Yeah.
Well, hey, what are your thoughts just based onthe last couple months of learning?
What are some takeaways that you would takeaway from just impact and clean tech?
Yeah, sure.
Certainly see a lot of different companies andvery interesting to talk to founders.
They all have very great vision how theirproducts can change the world really.
(04:05):
And certainly I think as you know, and thetrend recently is there seems to be more talk
about the Cleantech two point zero, which isvery different from the Cleantech one point
zero, which was in the early two thousandperiod.
So it seems that investors are more focusing oncompanies that can generate profits as well as
the social impacts at the same time.
(04:27):
Whereas in the past, it might be more on theprofit side or yeah, it's more difficult on
that side.
And then one trend that I'm particularlyfocused on is the circular economy trend for
those that you're less familiar with it.
Basically at the moment we are kind ofconsuming on a linear model where we make
(04:49):
things, we consume them and then we justdispose them at the end of life.
But actually in a circular model, it will beeverything.
The material will be in use in kind of acircular fashion where maybe after we're using
the products, we can recycle it, we canremanufacture it, or the waste of that product
can actually be raw material for anotherindustry.
(05:11):
For example, some companies that I've lookedat, they use chicken feather to make packaging
materials, or they can use other wastematerials like plastic, ocean waste plastic to
make other materials as well.
So I think that's certainly something that I'mvery interested in and great to see a lot of
these innovative products coming on.
That's great, cool.
Well, anybody have any questions aboutVanessa's career and how she transitioned
(05:37):
before we jump in.
All right, I guess we'll just go ahead and jumpin and feel free to message some questions in
the chat and I'll go ahead and try to call themout as we go, but I'll let you do your thing.
Oh yeah, any question just please shout at anypoint and if I not explain it clearly as well.
(06:00):
So hopefully you can now see the screen.
Yeah, we can see it.
Yep, that's great.
So yeah, today I just wanted to talk about abit about equity research, what it is, and then
about valuation in the public stock market aswell.
So I'll walk through different methodologiesand also do a case study to value Apple, the
(06:23):
stock.
And then I guess one thing to emphasize isvaluation.
As some of you might heard the phrase, it'smore about, it's more of an art than a science
in some sense because it relies on yourassumptions and your judgment and what your
view are on the company.
So although today I'm going to show you all thetools and the resources you need, ultimately as
(06:46):
an investor, you need to make that judgmentyourself whether you think that company is good
to invest, as I'm sure, Joe, you agree.
In the VC world as well, it depends a lot ofyour judgment and how do you see the world in
ten, fifteen years time.
Yeah, absolutely.
So yeah, firstly, just on a bit about equityresearch, what it is.
(07:06):
So basically it's a fundamental analysis onstocks to provide investment ideas.
So we tend to look a lot in-depth into thecompany's financials, the industry they operate
in and also some of the risk involved and thevaluation as well.
So in equity research, we can split into sellside and buy side.
(07:27):
So the sell side will be all the investmentbank, for example, like JP Morgan or Goldman
Sachs.
So they will provide research reports or ideasto investors.
And then these institutional investors who arethey?
They are the buy side clients.
So they are the pension funds or funds in thelikes of Fidelity or BlackRock for example.
(07:48):
So these are the investors.
They have actually got the capital to allocateand to invest.
So they typically invest according to theirfund mandates.
So their fund mandates could be geographical.
They invest in US for example, or they investin particular sector like the tech sector.
So teams, are usually structured by sector.
(08:09):
And one thing to stress is in the sell sideanalyst world, they tend to focus on the
smaller sets of stocks, for example, like 15 to20, because the ultimate goal is to be the
expert in your sector and in those 15 to 20stocks and when the buy side clients they want
some opinion advice, they will think of you andcome to you for your advice and opinion.
(08:33):
Just to show you what a typical equity researchreport looks like, So they range widely from
very short kind of two, three pages to quitelong forty, fifty, or even 60 pages depending
on what you want to write.
And if you want to write a really thematicindustrial piece with a lot of data then you
can write a lot about it to showcase all youranalysis.
(08:56):
So a typical one based on company would besomething that looks like this.
On the left here we will have the company nameand the body of the tax here will mostly
surround, will be mostly about your investmentthesis.
Why do you think that company is something goodto invest in?
And then we will have the rating here.
(09:19):
So you have buy, hold or sell.
Sometimes it depends on the companyterminologies as well.
So in this instance, it's overweight, whichmeans buy and certainly this analyst thinks
that twenty first Century Fox is a good stockto buy.
And then you have your price targets which wewill come on to later on how we derive that.
(09:42):
And then you will also have a risk sessions andsome of the valuation methodology and you will
also include a catalyst as well.
So this could be an event where you think,where you believe your investment thesis will
materialize.
So example could be if there's some newregulation coming in, then the catalyst will be
new when regulation is launched.
(10:03):
This is when your investment thesis will bematerialized.
So I'll just move on.
Sure, I thought it'd be kind of interesting toshow what a day is like as an equity research
analyst.
So I'll focus on the sell side first becausethis is mostly because this is what I'm
familiar with.
So usually it's quite, usually you can divideyour year into two period, you will have your
(10:27):
normal period and you also have your earningseason.
So during normal period is actually very, veryearly in the morning, we go to work, we arrive
at our desk at 7AM to catch up all the news andthis is when all the big announcement will be
released.
So you need to be ready if in case anythinghappens in the stocks that you cover.
(10:48):
If you publish your research overnight, thenyou'll spend your morning meeting with your
sales and you also call clients afterwards.
And then the rest of the day, it really varies.
It can be, you can continue your research workwhether they are big industry reports or
company updates or you can meet with clients oryou can speak to a company or industry
(11:08):
consultants in order to get a more updated viewor the recent view on some of the trends that
is happening in your sector.
So this is the normal period.
And then during earnings season which publiccompanies they usually announce their results
four times a year to update their investors.
So it can be quite hectic sometime.
So at 7AM they will release their earnings toshow this is the revenue or this is the
(11:33):
financial they achieved in the past quarter.
So your goal is to quickly digest the news ifthere is anything, any surprise or if they
perform according to your expectation.
And then you will quickly update clients saleson your view.
And then at 9AM is usually when the companywill present.
So you will have the CEO, the CFO and thesenior management of a company present their
(11:55):
quarterly results.
And then there will be also a Q and A sessionfor the analysts to ask questions as well.
And then for the rest of the day, you'll spendyour time digesting the news, thinking about
updating your company model if the news todayaffects your forecast of the company and
publish a new view.
So this is kind of a overview of the job natureand also a day in the life of an analyst.
(12:24):
And then something that I just wanted to touchon quickly is about sustainable and ESG
investing which is fast and growing.
Recently in recent years, I'm sure a lot of youhave heard the phrase ESG which stands for
environmental, social and governance.
And certainly it's a big area and there aredifferent strategies within the ESG investing
space.
(12:45):
So I just wanted to quickly introduce some ofthese ideas.
Certainly there are more resources and I canspend kind of the next hour talking about it
but this is just more of a high level summary.
So on the right here, you can see there is aspectrum different strategies.
(13:06):
You can go from financial only to impact only.
So this will be just kind of normal traditionalinvesting where you consider all the financial
results.
And then here you gradually incorporate moreand more different kind of ESG factors into
your investment consideration.
And then on the right here, it'll be kind oflike a charity or you give out donation or
(13:31):
grants where you only focus on the impact andthen you don't really care about the financial
return it generates.
So kind of the ESG investing is sit withinthese areas where we want to do good for the
society but then we also want to generate afinancial return.
And there are various strategy within the ESGinvesting space.
(13:52):
And nowadays we see more data providersstarting to provide these type of information.
So we've got MSCI and also Sustainalytics whichI think recently got acquired by FactSet.
So they are companies that provide a lot of thesustainable data.
For example, it's a bit like a credit scoring.
(14:13):
So for example, I know that MSCI, they're agreat company from CCC to AAA according to
their scores on ESG.
So if the company scored AAA then they will bedoing very great on all the ESG different
metrics.
So how investors use these data?
They can use it by negative screening or theycan by kind of screening the bottom by
(14:37):
screening out the bottom 10% of the company orthey can do positive screening by screening in
the top 10% of the company that performed wellunder these metrics.
And then we also have other strategy likethematic investing where investor only invest
in renewable energy for example, or they onlyinvest in electric vehicle.
(14:59):
And then at the far end we also have impactinvesting.
So this is a strategy that mostly more commonlyseen in private equities or financial capital.
So it is about investing in companies thatgenerate positive impact in social terms of and
environmental footprint.
(15:20):
So here you'll be actively seeking companiesthat do good for society whereas ESG sometimes
it can be a bit of a screening exercise.
So yeah, certainly an emerging area and thereare lots of new funds that are launching and
also different strategies as people arestarting to incorporate a lot of these
consideration into their investment strategies.
(15:44):
Any question from now?
Or I'll move on to the main topic for todaywhich is about valuation.
So yeah, typically I'll mostly focus onvaluation within the public investing space.
So typically we will use two methodologies.
(16:06):
The first one is multiple approach and thesecond one is DCF approach.
So for multiple approach, you can see here someof the metrics that we typically see and some
of you are familiar with.
So you can compare these metrics against acompany owned history or you can compare them
against different peer group within a differentcompany within the same peer group.
(16:31):
So I guess one of the questions that you mightask is which metrics should we use?
And a lot of the time it depends on the companyand the type of investor you are.
For example, if you invest in technologycompany and maybe they are very early stage and
they don't even have earnings.
Yeah, for example, like Uber or Lyft, theygenerate that income yet.
(16:52):
So you can't really use price to earningsratio.
Investor would typically use divided by salesas a metrics to evaluate those companies.
And for example, if you are a income investor,you care a lot about dividend, then you will
use dividend yield as your analysis.
But in reality, we look at all of them and thenwe just kind of see what is most appropriate
(17:22):
according to the company or the sector that youlook at.
So this is kind of a, on the right here is atypical comparative table that you will see in
a lot of the research reports.
So firstly, for example, if you want to analyzethe beverage sector and you will have a peer
(17:42):
group, so the first step will be to identifyall the relevant peer groups.
So you've got like Coca Cola here, PepsiCo, andMonster Beverage here, for example.
And then you will compute all of this data soyou can find them on either Bloomberg FactSet
or Yahoo Finance, for example.
And then you will compute the multiples.
(18:04):
And then you will think about, oh, why is CocaCola trading at a premium compared to PepsiCo?
Is this fair?
And if this is not fair, then is there anyreason that can justify that?
Or that, I guess that kind of thinking processcan inform your investment thesis.
For example, if you think that PepsiCo, thatseems to be able to grow much quicker or they
(18:30):
have a new strategy that you believe they canexecute on it, that maybe PepsiCo should be
trading kind of closer to Coca Cola.
And then that will kind of, that thinkingprocess will kind of inform your view on the
company whether that valuation is fair or not.
So yeah, I think this is a quite good approachvery quickly that you can see if there is any
(18:54):
kind of mispricing in the market or if you canjustify these gap between the companies.
But yeah, I'll come back to this again when wego through the Apple case study.
And then the next valuation method is DCF whichI'm sure a lot of you have heard of before.
(19:17):
So what a DCF is to calculate the valuation ofa company and what is a valuation of a company
is essentially you add up all the future freecash flow a company generates and then you sum
it all up and then discount it back to today'sprice.
So it's a bit like the graph here.
So firstly you project all the free cash flowin each year and then because you can't really
(19:42):
project it infinitely so at the end of theperiod you kind of have a terminal value and
then you sum it all up, discount it back totoday's price.
So this will give you an enterprise value whichis the total value of a company.
And obviously there are different owners for acompany.
You've got the debt or the debt provider,you've got the equity provider and other
minority interests as well.
(20:03):
So as an equity investor, you are mostinterested in the equity portion.
So you minus debts, you minus the monetaryinterest and you'll get to your equity value.
And then if you divide that equity value by thenumber of shares, you will get your share
price.
So fundamentally this is kind of the concept ofit but I'll show you the calculation step by
(20:24):
step in our case study later.
So yeah, these are just some of the formulas inorder to derive exactly what these things are.
But yeah, I'll show you in our Excel model gothrough later on.
And then just some kind of thinking about thepros and cons for each method.
(20:48):
In real life, we will use both the multipleapproach and DCF approach.
Usually some analysts, they would take anaverage of these two approach because each of
these approach, they have their pros and cons.
For example, the multiple approach, you can seethat it's really easy to get all the datas.
It relies on fewer assumption, but thensometimes it's really hard to find the
(21:12):
comparable companies.
For example, for Apple that I'll come on tolater on, it's kind of hard to think of another
company like Apple.
I mean, you've got other software internetcompany like Microsoft or Google, but they are
more of an internet company and they don'treally produce a physical product like Apple.
So finding a comparable group is sometimes itcan be tricky.
(21:35):
And now on the DCF side is very flexible.
You can model a lot of things into it.
You can even split it out into multi stagegrowth for the company.
So you can incorporate a lot of theassumptions, but then the cons will be based on
a lot of assumptions and the sensitivity of theshare price will be based on the assumption and
(22:01):
also on the terminal value as well.
I think DCF will work particularly well forvery stable company.
For example, like Unilever or Coca Cola perhapsbecause they are the companies that generates
certain amounts of cash each year.
So it's very easy to forecast.
But then if it is a highly cyclical company,it's very difficult to forecast the kind of
(22:23):
company performance throughout the businesscycle.
And then in a startup world it's even moredifficult because it's very difficult to
forecast the company in kind of a five to tenyears horizon.
So these are kind of the pros and cons for thetwo approach.
And now if there is no question at this point,I'll move on to our case study on Apple.
(22:51):
Yep, so I choose Apple as an example becauseall of us know what they do and that we can
quickly see use the method that we learned sofar and apply it to calculate the share price
of Apple.
One thing is to stress is this is more of akind of an exercise rather than any investment
(23:12):
advice.
So it's more about going through themethodology that we learned in order to
calculate the share price for Apple.
So yeah, some background news recently.
I guess, yeah, you can see from this chartalthough it's PE ratio rather than the share
price but the share price kind of correspondquite nicely to that as well.
(23:33):
You can see from January 2020 they have a verygood run or year to date the share price goes
up by 40% which is a very, very good return.
And recently as most of you know, theyannounced some product release including the
new iPhone, the five gs version, which kind ofcontributed some of the spike here.
(23:56):
And then last week they announced they had anearning release which after that the share
price kind of drops.
So it could perhaps be, yeah, it kind of resetinvestor expectation or they have some other
concern regarding the company futureperformance.
Some of them could be due to COVID or some ofthem could be due to because they decided to
(24:17):
delay their five gs phone launch by a fewmonths.
So that could impact on their companyperformance.
So yeah, firstly just using the technique thatwe've learned so far, the first one will be the
multiple approach.
So you can use multiple approach to compare thecompany with its own history.
(24:39):
So this is exactly what I did here.
So you can see on a PE ratio perspective, thecompany they have been historically trading at
about 10 times to 12 times PE ratio.
But then recently it seems that they have goneup really, really massively and they have now,
I know it's a bit small here, but they are nowtrading on a 28 times earning next year.
(25:00):
So I guess as an analyst, need to think about,what's behind the driver of this increase?
Is it fair or are we overvaluing the company?
Has there been some fundamental changes to thebusiness itself?
And then we can see a similar trend forEVEBITDA ratio as well.
(25:21):
It has gone up massively last year.
And that another approach will be to comparethe different ratio against some of the peer
group for Apple.
So in here I've chosen Microsoft, Google andFacebook.
Although I guess some people would argue theyare not a true representative of peer group,
(25:44):
but I just show it as an illustrative example.
So we look at, so Apple is the blue color here,whereas think it might be quite interesting to
compare against Microsoft which is the redcolor here.
So you can see that Apple has traditionallybeen trading as a discount to Microsoft And
(26:06):
some of the reason could be because Microsoftas a more software company, they typically have
high margins.
They can also scale quicker rather thancompared to Apple which they produce a tangible
product.
So this is kind of the reason why there hasbeen a valuation gap between a company.
So this valuation gap kind of lasts until 2020.
(26:29):
And then this is kind of the COVID period.
And then after that it seems the gap hasshrunken.
So now Apple has been trading very in line withMicrosoft as well.
So a question to think about will be, again, isthis justifiable?
Do we think the market is overvaluing Apple orhas there been some fundamental changes to the
(26:52):
company itself that investors seems to beplacing a higher valuation on the stock at the
moment?
So again, a similar story for EVEBITDA as well.
Oh, and then I think I can now show you on theDCF model, how do we actually calculate the
(27:12):
share price?
So if I just switch to model.
Yeah, if I make it slightly larger.
(27:33):
Okay, so just to recap the formula, DCF we wantto forecast all the free cash flow for the
company.
We want to sum them up and we also want toinclude a terminal value and then we discount
it by a discount factor called WACC.
So we will go through these all step by step.
(27:56):
So firstly, will want to forecast the free cashflow firstly, which is this is the formula for
it.
Essentially, you just want to add up all thecash item that a company generate per year.
So for example, why do we want to add backdepreciation and amortization because they are
not a cash item.
Why do we want to minus CapEx?
(28:17):
Because CapEx is the actual capital expenditureyou spend per year.
So we want to minus that.
So it is a cash outflow and that's definitelywe want to minus that.
So in here I did exactly that in thiscalculation here.
So I'll have my EBIT here which is just revenueminus the operating cost.
(28:38):
So I base it all on twenty twenty actuals.
So my starting point is this year and then I'llforecast it what will the business be like from
year one to year five, for example.
So just on the formatting, you can change allthe cell in yellow.
So you can change all of them here and then allof these should just calculate automatically.
(29:03):
So if you want, you can change it to anothercompany and you should be able to populate
their share price quite quickly as well.
So yeah, just on the forecasting.
So firstly we wanted forecasted revenue item.
So these are the assumptions that I choose.
It's kind of arbitrary at this point because ifyou want to form a informed view, would need to
(29:24):
go through the company financials and also do alot of in-depth industry and company research.
So at the moment I just assume the company willgrow by 15% next year just because of the new
iPhone launch and then assume a 5% growthafterwards.
For EBIT margin, I assume they will gain by 1%next year and then kind of just grow at a slow
(29:48):
rate in future period.
For the items, I just keep them flat for now sothat we can focus more on the calculation
rather than the assumption at this point.
So this is exactly how I calculate theunlevered free cash flow as I was showing in a
formula by summing all these items together.
(30:09):
And then you want to discount this free cashflow back to today's value and that this form
the first part of our calculation which issumming the cash flow from year one to five.
And then for a terminal period, we have twomethods that we can use.
So going back to the formula here, we caneither use the exit multiple or the perpetual
(30:36):
method.
So the exit multiple, just say, imagine Appleget acquired in five years time, what would the
multiple be and what is the value of thecompany at that point?
Another perpetual method is just rather thansumming it all these up individually, it is a
mathematical neat way of saying summing fromperiod three at this point to period end, and
(31:04):
then this is a mathematical equivalent to that,which is you have the end period free cash flow
for the end year period, you do one plus thegrowth rate and then you divide up by the WACC
minus growth rate.
So going back to the DCF, this is exactly whatI did.
(31:25):
So go through the multiple exit multiple methodfirst.
So I take the end year period and the EBITDAfor year five, And then I assume an 18 times
exit multiple.
I mean, can change it to other multiple, but Ithink this is kind of appropriate just by
(31:46):
looking at historical trend and kind ofcomparing it with peer group.
So, I choose 18 times in this calculation here.
And then for the perpetual growth, so this isthe calculation that I was showing earlier.
So, you do the free cash flow for the n yearperiod, multiply it by the growth rate which I
(32:08):
assume is 3% terminal growth rate and then youdo the WACC minus the terminal growth rate.
We have been through this calculation and thenthe final session will be how do we come up
with the discount rate.
So what the discount rate is, so it's calledthe weighted average cost of capital.
(32:31):
It is kind of showing yeah, it's kind ofshowing the capital structure of a company
because usually for a company they will requiresome equity and also some debts and this is
just the cost of that capital, how expensive orhow cheap it is in order for them to access
that capital.
So it's kind of a weighted average calculation.
(32:53):
So I can go through the calculation here at theend, which you can see on this session here,
the WACC calculation.
So firstly, on the cost of equity, this is thecalculation we typically use.
So we will use the risk free rate and then weplus the beta times the equity risk premium.
(33:14):
So that's our cost of equity.
And then on the cost of debt side, this will bethe interest rate the company paid minus the
tax rate.
All of this information you can get either fromYahoo Finance or the company financials itself.
And then on the proportion of debts and equity,so this is the debt Apple has last year and
(33:39):
then this is the market cap at the moment whichis part of the equity.
And then throughout this calculation, Icalculate a WACC of 7.9%, kind of like 8%.
So we are going back to here.
We now talk through how do we calculate theterminal value and the free cash flow for the
(34:02):
initial period.
So this will be our enterprise value.
And then now, as I was showing earlier, we needto minus the debts because as an equity
investor, we are only interested in the equityportion.
And we also add that cash, which is the cashthat we can access to as an equity investor.
And then we divide it by the number of sharesApple has.
(34:24):
And then based on these assumption, I calculatethat Apple should The kind of the equity value
for Apple is $98 per share.
So yesterday when I was looking up, they weretrading at 109 yesterday.
So this is just that based on theseassumptions, it would suggest a 10% downside.
(34:46):
But obviously you can change these assumptionsreally quickly.
For example, if you think Apple next year willbe growing by 20%, you can quickly change that
and then you can see the valuation going up.
I mean, if you're not positive about the iPhonelaunch then you can change it to 3% that will
show you some more downside to the currentshare price.
(35:10):
So all of this, you can quickly see how as aninvestor you can calculate based on DCF the
valuation of company really quickly.
Any question at this point?
Yeah Vanessa, the blue cells, the ones withjust the blue text, are those just cells that
are referencing another cell or can you adjustthose too?
(35:33):
Yes, that's right.
So yeah, it's just referencing another cell.
So these are the calculation that was done.
So all of the yellow ones you can change andother ones, it just automatically calculated.
Cool.
So hopefully it will be, this is a very step bystep walkthrough of this calculation here.
(35:56):
But I guess just to emphasize the concept isjust to add order of cashflow for a company and
then discount it backwards.
That's the high level of what this is trying todo.
And then here you can see the sensitivitybecause I was talking earlier about how the DCF
methodology depends a lot of the assumptions.
(36:16):
So this is just a sensitivity table that Ithought we useful to show.
For example, at the moment we assume about an8% WACC and also a 3% terminal growth rate,
which makes our price at about a 100 at themoment.
But then if we increase our terminal growthrates and if we decrease our WACC, we can
(36:37):
arrive at this price kind of based on these twoassumptions.
So I think this is just a good way, especiallyif you are an investor, want to have that
sensitivity analysis and to make sure you'recomfortable with the evaluation that would
gives you a potential upside.
So this is the DCF method and then back to themultiples method I was talking about earlier.
(37:05):
This is again, you can play around with itbased on the assumption that you choose.
For example, if we use a EVEBITDA method, sothis will be the Apple's EBITDA for next year
and that if we believe they can trade, theywill trade at an 18 times multiple, then I can
type in 18 times here.
(37:26):
And then you can see based on theseassumptions, it will suggest a 12% downside to
the current share price.
But then if I believe that Apple's, they cansustain a high multiple, for example, two, then
it will show you the upside that you cangenerate.
And I think this is particularly usefulsometime when I evaluate some of the startup
(37:46):
deals as well, because ultimately this willgive you a valuation when you want to exit and
then you can work backwards to see how muchvaluation upside you can gain as an early stage
investor.
And as the company progress, what is thevaluation they are likely to achieve And then
what is the potential there are for foreigninvestors?
(38:13):
So yeah, this is just a quick walkthrough ofthe model.
Something that I was thinking about showing aswell unless there is other question at this
point.
Any questions guys?
(38:37):
So yeah, some of these information I got fromKoiFem which is a free platform for people to
use.
It's bit like Yahoo Finance but I think it'smore, it has got more data and also the user
interface, quite like it as well.
Because earlier I was talking about the comtable and how does Apple compare to other
comparison, for example.
(38:59):
And then in this table here, select all thepeer group.
And then you can see that, for example, if I goto the margins, Apple, they have been Their
EBITDA margin was about 30% last year.
But now for Microsoft, which is a softwarecompany, they are a 45%.
(39:19):
So maybe part of the valuation gap can bejustified by just the fact that Microsoft has a
higher margins, for example.
So this is quite a neat way to show some of thedifferences in valuation and whether you think
is justified.
But yeah, I thought that would be interestingto show.
For example, Microsoft, they pay a highdividend, which sometimes investors like as
(39:43):
well.
And that will certainly be factoring into thehigh valuation.
That's great.
Cool.
What are some of the pros and cons with Koyfinversus some of the other tools?
I think maybe what would be helpful if we got afew minutes is what tools you can use, whatever
(40:08):
you're allowed to share when you do research.
Because we got Koyfin, got Bloomberg, we gotThompson.
Coyfin, I think they're a startup, butobviously they haven't been around as long as
some of these older companies.
So what are some of benefits?
Then maybe a couple of workflows that you dowhen you're researching maybe a new public
(40:31):
company.
Yeah, sure.
I think maybe what should we, we can do a testone for example.
So yeah, I really like the Khoefan platformbecause it gives me a lot of data points.
So for example, I think that the platform, itlooks a bit like Bloomberg or Reuters, but I
(40:55):
think for a retail investor like myself andsome people in the audience, we don't have the
access for Reuters or Bloomberg because theyare typically for institutional investors.
So I think Koinfen is a very good alternativefor retail investors like ours.
So it has all the essential information youneed.
One session that I really like as well is theestimate session because in here you can see
(41:19):
what do analysts and people in the investmentbanking world, they forecast in terms of the
revenue, EBITDA or EPS.
So you can know that what been for, what been,what is the expectation of this company?
Because usually when company, when theyunderperform the expectation that share price
(41:45):
would come down.
If they over perform, they over deliver thenshare price would go up.
So this is a very quick way for you just to seewhat is the expectation embedded in the share
price at the moment and then whether you thinkit's justified or not.
Also like the chart sessions because here youcan input other security as well.
(42:09):
So some of the charts I was showing I generatedon Poison.
What is a good stock to choose?
Maybe I'll show some packaging company that I'mmore familiar with.
So for example Crown, they are a metal beveragecan company.
(42:34):
So you can quickly see their price movementhere.
And then if I want that valuation then I canquickly select the valuations and go into kind
of the EVEBITDA multiple.
I can compare it very quickly with anothermetal beverage company and see the valuation
gap, for example.
So again, this is very easy to show.
(42:57):
And I guess the major benefit of Kotlin is freeto use, or at least for now, not sure if they
are going to charge in the future.
And then just some workflow or other resourcesthat I use, I typically go on to, so if I'm
researching a new company, would typically goto the investor relations page, I'll download
(43:17):
their annual report and see the latest earningsbecause through that you will see the latest
trends that the company is going through, howare they performing against expectations and if
they have any new strategy and things likethat.
And usually in annual reports you can find lotsof detailed information on the industry
(43:38):
structure, some of the trends, some of thedriver as well.
So it's very useful information.
And then other than that, I'll just go ontothis platform and then quickly look at the
valuation side.
If I think the valuation potential, then I'lldo more in-depth research.
If I think the company is kind of fairlyvalued, then I'll just put it on one side and
(43:58):
then focus on other companies.
And I think sometime maybe for our cohorts andthe startup invest VC investors as well.
Some of the things that might be useful is justto, because sometimes you ask us what is the
potential upside or potential exit that ourcompany can have.
(44:20):
So you can quickly go to the platform that Iwas showing earlier.
You can get a list of companies.
You can see that exit multiples, which couldinform you what are the multiples that the
company in the sector are trading at themoment.
And from there you can work on your potentialexit opportunity for a startup.
(44:47):
So yeah, this is poison.
Great.
Yeah, that was helpful.
All right.
Any other questions from the audience?
Okay, I guess it was so informative that thatyou answered everybody's questions already.
(45:10):
Yeah.
I'm just thinking of exiting.
Oh, stop sharing.
There you go.
Okay.
I can now see you.
Yeah.
There we go.
Well, good job.
Thanks so much for sharing that info.
That was really helpful.
I think it's a good overview of just kind ofplaying with the models.
And I uploaded the links to the deck and themodels so people can play with it, know, make
(45:33):
your I guess for your recommendation, somebodyshould make a copy of the Excel and possibly
look up a different company and plug in thenumbers and then make some assumptions on how
much the company is going to grow.
Yeah, that would definitely be myrecommendation.
You can also choose your favorite company, acompany that you're familiar with, and then
(45:54):
just see if the valuation is what is expecting,the company is currently trading at the moment,
just to see what the assumption is like and geta feel of it.
That's great, cool, awesome.
High
level, but then if people are interested, thereare certainly more advanced models that we use.
(46:16):
Typically for DCF model, we will we will breakdown the revenue by segment, for example.
So for example, in the case of Apple, then wewill break down the revenue for iPhone, for the
iWatch and different components of it.
We will also forecast the profit by segment aswell because that way you get a more detailed
(46:39):
analysis and detailed forecast which ultimatelydrives the valuation.
You all want to have those details in if youare doing it in real life or as career or
profession.
In the private markets, look at comps.
Do you guys also do that as well?
Maybe other consumer electronic companies, ifyou're looking at Apple, as far as their EV to
(47:06):
equity multiple?
Is that kind of a common practice?
What's the best way to do that?
Do you just take the average of the comps ofwhat their multiple is and then just kind of
use that as a benchmark?
Yeah, yeah, we will certainly do that as well.
And it depends on how closely comparable howcomparable those peers are.
(47:28):
Some people just use an average or some peoplewill choose some particular company as
benchmark and average.
I think that certainly works well for someindustry but less so for others.
Yeah, I mean in a commodity company like metalpackaging, for example, essentially every
producer, they are producing the same amount,same type of products.
(47:51):
So you can argue they should be trading on asimilar multiple because essentially the
business are the same.
But then I guess there are other nuances likedifferent company strategy, different
geographical region that they are exposed to.
So a lot of these factors can be, you canincorporate as well.
So definitely a very fun exercise and yeah andI guess I've seen some stats saying that people
(48:15):
nowadays because guess everyone kind of in thelockdown period there's been some spike in
either like Robinhood in US or in The UK we useFree Trade or other apps like that.
So there has been a spike in retail investorinvesting or have the time to at least explore
the opportunity.
(48:35):
So that's quite interesting.
Good news for Robinhood, right?
Yeah.
Cool.
All right.
Well, anybody else have any final questionsbefore we close out?
Cool.
I guess not.
Well, thanks for your time and catch up withyou guys soon.
Cool, sure.
(48:56):
And thanks for everyone here and lookingforward to speaking to you all and get
connected.
All right.
Bye guys.
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